What's worse?...Defaulting on construction loan or permanent loan?

[Anonymous]

Ok, here we go again with my construction loan questions.  I still owe $17,000 in interest on a $825,000 construction to permanent loan.  Nothing has hit my credit report yet.  Is there any benefit to try to pay the $17,000, and then I will definately default on the permanent $5500/month, or do nothing and default on the construction loan oweing $17,000 interest?  The home is technically done, but I never signed the loan modification docs when they came to modify it to permanent financing.  I was told it was better to default on the construction side of things?

[ShanetheMortgageMan]

Defaulting on a construction loan or mortgage is looked at the exact same... as a foreclosure.  What is your goal though?  Do you want to hold onto this home?

[Anonymous]

I do not want to hold onto this home.  I want to limit the FICO hit obviously.  I am probably being given misleading information when someone says it is slightly better to default on the construction side of things as opposed to the permanent.  I assume it doesn't really matter?

[ShanetheMortgageMan]

Yeah, it wouldn't make a difference if you defaulted on the construction portion or on the permanent portion... they'd still report a foreclosure on your credit either way. Is there any way you can sell it and avoid defaulting?

[Anonymous]

It's been on the market since March.  I've lowered past the $825,000 mark now.  The bank wants all sorts of financial info to apply for a short sale or deed in lieu.  Neither seem worth it because I can't sell it anyway, why go through a paperwork hassle with the bank when a standard foreclosure is the likely outcome anyway?

[ShanetheMortgageMan]

Well, true, but I'd think you'd want all possible options to look into.  You'd have to research foreclosure procedures in your state, for example you might get a definciency judgment put on your credit for the difference in what they sell it for vs. what is owed... vs. a short sale that debt would be forgiven (but you'd get a 1099 for the income and would need to pay taxes on it).  A bankruptcy can be one way to avoid either, but I'd recommend you speak to a bankruptcy attorney before you'd go that route.  Foreclosure/short sale is looked at worse than a bankruptcy when it comes to obtaining a new mortgage again... although a home included in BK is looked at like a foreclosure.  You'd have to do what's best for your credit/personal situation.

[Anonymous]

Ok, thanks.  The home is in Arizona which has anti-deficiency statutes on the books , so I feel safe from the bank.  I've heard nothing good about bankruptcy, and that it's harder to file for now.  The 1099 is an issue, but I need to find out what value the bank uses to determine if there's any deficiency at all.  Do they wait to see what it sells for at a Trustee sale, or take the home's appraised value at foreclosure?  That could be a big difference.  The home originally appraised for $1.1 million in spring of 2006 before construction began.  A foreclosure that will be gone from my credit in 7-10 years doesn't seem all that bad.  I'm not moving, I own two cars, no CC debt, so I feel very lucky.  I have no need for any new loans.  I advise everyone to watch out for dishonest brokers who want to earn the commissions, get the loan through, and walk away.  That's what happened to me.  I was very nieve and got duped in this whole mess.  I can only blame myself for signing on the dotted line without duoble and triple checking everything.  Hopefully, in a few years my credit will be repaired, and I will be back on track.  Good luck to all!

[ShanetheMortgageMan]

I believe they wait to see what it sells for at the trustee's sale vs. what is owed on the property, then if they can't pay the mortgage off in full they'd issue you a 1099 for the difference.